tv Nightly Business Report PBS October 2, 2010 12:00am-12:30am PST
>> susie: the report wall street has been waiting for is out, telling us what caused may's flash crash. that's when the dow lost almost 1,000 points in 20 minutes. >> tom: while the report details the dive moment by moment, it's light on solutions. we talk with a former head of the s.e.c. about how to level the playing field for investors like you. you're watching "nightly business report" for friday, october 1. this is "nightly business report" with susie gharib and tom hudson. "nightly business report" is made possible by:
this program is made possible by contributions to your pbs station from viewers like you. captioning sponsored by wpbt >> susie: good evening everyone. some answers tonight on what really caused the market meltdown known as the flash crash. tom, it's been five months since that tumultuous market event back in may, and regulators finally released their findings. >> tom: susie, the 104-page report was the talk of the markets. it turns out the crash wasn't the result of any market manipulation, but because of a single investment firm and a single trade that was executed too quickly. >> susie: and on a day when the
markets were already under pressure, as stephanie dhue explains, regulators outlined the chain of events on may 6 that led to the flash crash. >> reporter: it was may 6. stocks were down, markets were volatile and liquidity was thinning. at 2:32 that afternoon, an order from what the report calls a "large fundamental trader" initiated a sell program for some $4 billion of e-mini futures contracts as a hedge against an existing equity position. the unidentified trader, which sources say is mutual fund firm waddell & reed, placed the trade using an algorithm that was programmed to feed orders into the market without regard to price or time. the trade took just 20 minutes to execute. as a result, liquidity dried up and the markets went into free fall. the action was so fast, and furious, buy and sell orders could not be matched. some trades were executed at
irrational prices as low as a penny or as high as $100,000. the report stopped short of recommending new trading rules. shortly after may 6, new circuit breakers were put in place, and regulators clarified when trades can be broken. but c.f.t.c. chairman gary gensler says there's still a lot of work to do. >> we're going to take a look at this staff report, with the outside experts that we have, and really look at how we can put in place further risk mitigations, so that events like may 6... so that we have fair and orderly markets, and orderly is important for the confidence of investors. >> reporter: themis trading works with hedge funds and money managers looking for the best trading execution. themis co-founder joe saluzzi blames fragmented markets and uneven regulation for the flash crash. >> liquidity providers became liquidity demanders, and that's a key problem here how do you incent real liquidity providers?
we know there's always going to be situations, back in 1987, you have to have a market with a more centralized price and that's not what we have right now. >> reporter: retail investors fled the market after the flash crash and are now only beginning to step back in. analysts say investors need a lot more reassurance it won't happen again. stephanie dhue, "nightly business report," washington. >> tom: here are the stories in tonight's n.b.r. newswheel: wall street starts the fourth quarter with modest gains. the dow rose 41 points, the nasdaq added two and the s&p 500 was up five. trading volume was down from yesterday, just over a billion shares moving on the big board, just under two billion on the nasdaq. manufacturing activity expanded last month, but at a slightly slower pace. the institute for supply management's manufacturing index read 54.4 in september, august's came in at 56. any reading above 50 indicates growth. and bank of america is halting foreclosures in 23 states, reviewing how it handles paperwork.
j.p. morgan chase and ally financial have already made the same move. meanwhile, connecticut's attorney general wants state courts to freeze foreclosures for 60 days while those paperwork issues are addressed. >> tom: still ahead, will the cruze help g.m. cruise back to profitability? a look at the new small car offering and what it could mean for g.m. >> susie: back now to our top story-- what caused the flash crash? our guest tonight is on a special commission to review the findings of today's report and to make recommendations. he's david ruder, former chairman of the securities and exchange commission, and now professor emeritus of northwestern university's school of law. david, welcome back to "nightly business report." >> thank you, susie. >> susie: let me begin by asking you, were you satisfied with the findings of the report? >> i think the report was extremely well done, very detailed, and gave a good, solid picture of what happened on may 6th.
>> susie: now, it didn't give any recommendations or any solutions, and that's going be the job of your commission. i know you haven't had a chance to really study the report. but if there were any key element, key solution, that you would recommend, what would it be? >> well, one has to look at what went on there. and the real problem is the liquidity disappeared in the markets. so steps have to be taken to encourage liquidity providers to stay in the market. >> susie: and how could that be done? >> well, you could -- there are lots of ways. one could deal with the market makers and give them responsibilities. one could ask the high frequency traders to stay in the market for a short period of time. but none of these solutions are anywhere near the recommendationñstage. >> susie: you mentioned high frequency traders. there has been a lot of criticism of these high-speed program traders. and some have suggested that they have advantages
over individual investors, and perhaps some of their activities should be restricted. where do you stand on this issue? >> i think we need to understand that the trading in the markets has changed enormously in the last five years. the high freesh frequency trades are able to trade using computers in milliseconds. in the time you can't even blink your eye. it is an enormous advantage to them. but it is not all bad. some of those traders are providing liquidity to the market and narrowing spreads. so we have to be very careful in trying to rein them in in steps that are hopefully going to help the retail investor. >> susie: one thing that i found interesting that came out of this report, it was not like anybody had done anything malicious. this was a very traditional kind of trade. it wasn't that big of a trade, and yet it was so disruptive. so what should we conclude
from that kind of information about the frachtlity and the vulnerability of the markets. >> unfortunately, we have to conclude that volatility will continue. you used the world vulnerability, but i don't think that is the word. i think our markets are very fine markets, well-run. but we have to be concerned about events like may 6th in which people may panic. >> susie: that is one concern for many individual investors. they get scared when they hear about these market meltdowns, back in 1987, with the crash of '87, you were the head of the f.c.c. now this flash crash. why should investors feel good about investing in the market? >> well, i'm going to give that some advice, and that is that most investors should be value investors, staying in the market for longer terms. the volatility problems affect investors who are in and out of the market. i think those investors ought to be very careful about it. they should look at
volatility, perhaps as entertainment, rather than something that is really terrible. >> susie: a lot of investors feel that markets are just for the professionals, and not for individuals. what do you think? >> the professionals have always had advantages over the individual investors, and i think that is something they -- the individuals have to live with. but they can take steps to protect themselves. they can put in limit orders to prevent them having the market going way down. they can use brokerage advisors who can caution them and provide good routing for their orders. there are lots of protections outer there for the individual investor. >> susie: over all when you looked at what happened on may 6th and the read the report, what would you say are the lessons from this latest crash? >> the lessons are that the market is very, very complicated. changing markets. 60% of the volume is
computer-driven, and there is a great need for study and caution, and yet there has to be some efforts to slow down the markets to protect the average investor. but one cannot come up with very certain recommendations to protect the market. >> susie: we're going to be waiting to see what recommendation you do come up with your commission. and thank you so much for coming on our program this evening. >> you're welcome. >> susie: we've been speebing with david riewrtd, former chairman of the securities and exchange commission.
>> susie: so, tom, a modest but still positive start to october 1st, and the beginning of the fourth quarter. >> how about it. clearly it is the september we're all remembering. but it has been a week of very small moves in this market, digesting the september gains, and looking ahead to earnings season beginning next week. let's get everybody updated tonight, susie, in tonight's "market focus." >> tom: the new quarter begins with small gains for the major indices. this was a week of modest moves. the dow industrials fell three out of the past five sessions to end the week down 0.25%. mild weakness there. the nasdaq is 0.4% lower tonight as compared to a week ago, and the s&p 500 dropped 0.2%.
clearly some modest losses, but this is first week in four the indices are down. hewlett-packard was the biggest laggard of the dow. volume was very strong as investors didn't react kindly to the naming of former s.a.p. c.e.o. leo apotheker as the new h.p. boss. shares fell 3%. the new boss gets a base salary of $1.2 million and up to a $6 million bonus. the stock continues trading well below the $46 it was at before mark hurd was forced out in early august. citi always is among the most actives, but today it saw huge composite volume, even for citi. more than 770 million shares on this 4.6% move higher. the u.s. treasury has sold more than half the shares it received in the bailout of citi group. economically sensitive stocks led the gainers, with the energy and material sectors topping performers. coal miner consol energy closed a pennsylvania mine and stopped production at one in utah because of costs. it means 231 layoffs.
shares jumped 3.5%. copper and gold miner freeport mcmoran added more than 4% with gold hitting another record high. and iron ore miner cliffs natural resources rallied 4%. the market is quick to react to any merger news. today it was overseas, an international deal. spanish oil company repsol sold 40% of its brazilian business to china's sinopec group for $7.1 billion. repsol stock jumped almost 7%. sinopec saw a fractional gain. the merger rumor, meantime, was in children's clothing. retailer gymboree shot up 20%. the "wall street journal" reports the company is seeing if there are private equity buyers interested. we mentioned in the newswheel that another big bank is halting foreclosures while it sorts out questions about paperwork; title insurance stocks were hit by worries that paperwork problems may put millions of titles into question.
a couple to look at here. fidelity national and first american each saw stronger volumes on these drops. together, these two command two- thirds of the market share for title insurance. fridays are big for movies, and today was big for imax. not a movie opening, but rather movie theater chain regal will add more than a dozen imax theaters in the next couple years. while regal saw a fractional gain, imax stock rallied almost 7%. the stock is above $18 for the first time since may. it was a busy week for new stocks, with seven initial public offerings-- including three from china-- tapping into american investors. it was a big bang for china- cache, an internet content company. it priced just below $14, and almost doubled on its first day of trading today. wind turbine maker china ming yang started at $14, and moved lower. and country style cooking is a quick service restaurant chain in china. it came public on tuesday at $16.50, tonight it's above $29. the four other new stocks:
amyris designs alternative products for the chemical and oil markets, but doesn't have anything on the market yet. german company elster had a nice reception, it makes natural gas, water and electric meters. k.e.y.w. holdings is a cyber security firm and saw a double- digit return. coal miner rhino resources has 11 mines in the u.s. shares up 5% today. and that's tonight's "market focus." >> susie: auto sales struggled to pick up speed in september, but the results were strong enough to show huge increases when compared to a year ago.
that's when the government's cash for clunkers program ended and sales almost screeched to a halt. now, chrysler and ford saw sales increases of 61% and 46% respectively last month. ford was the standout, it posted a gain in september from the previous month. toyota sales revved up 17% last month, while general motors rose 11%. g.m. is now banking on its chevrolet cruze to bring in big business. the snazzy compact is rolling into dealer showrooms and consumers are snatching them up as fast as they can. experts say a success with the cruze is crucial for g.m. as it prepares for its initial public offering. diane eastabrook has more. >> reporter: we wanted to check out the cruze, but chevrolet dealer mike anderson didn't have the car, so he had to bring one in. >> we got two of them in about five days ago, and they sell almost as soon as they hit the
ground-- within two days of receiving them. >> reporter: the cruze has been a huge hit for g.m. overseas, so successful it rolled out a hatchback version for europe at the paris auto show. it hopes the cruze will be a hit here at home. decades ago, the company basically ceded the small car segment to toyota and honda, preferring to make larger, more profitable trucks and sedans. but rising fuel costs and promises to build more fuel efficient vehicles in exchange for government bailouts forced the company to play catch-up. the cruze gets, on average, 36 miles per gallon. the car's marketing manager thinks that, and added features, will impress consumers. >> we're going to offer great performance with a 1.4 liter turbo engine, and we're going to offer a host of amenities that they really desire in a compact car, things like a u.s.b. port, bluetooth capability, heated leather seats, a very premium nine-speaker pioneer sound system. >> reporter: those extras make the cruze more expensive than toyota's corolla, but cheaper than honda's civic and ford's focus. still david thomas, senior editor for cars.com, thinks some chevy buyers could be turned off by the cruze's sticker price,
because it's predecessor, the cobalt, was about two grand less. >> they were used to getting inexpensive product to get them from point "a" to "b," it might be a little bit of sticker shock on this new cruze. now if they are a corolla or civic shopper, the price is going to be very similar and they are going to see a product that is very nice inside and very roomy. >> reporter: g.m. says it could be another month before dealers have significant inventories of the cruze. experts say it could take several more months for g.m. to know if it has a hit with this car. diane eastabrook, "nightly business report," chicago. >> tom: here's what we're watching for next week: our friday "market monitor" guest is randall eley, president of the edgar lomax company. and next week, we'll also see september's employment report along with september's chain store sales. monday, how to fix the economy? we ask nobel laureate economist joseph stiglitz what he thinks policymakers should do. >> susie: here's an interesting new partnership in healthcare:
wal-mart and health insurer humana. they're offering a medicare prescription drug coverage plan for just under $15 a month. they say it'll have the lowest premiums in the country when it launches nationwide next year. some drug co-payments will be as low as $2 when prescriptions are filled at wal-mart or sam's club pharmacies. and, no co-pays for some generics. >> tom: first fedex raised this week, now u.p.s. is doing the same. the delivery company's freight unit today announced a rate increase of nearly 6% on average. it applies to packages weighing more than 150 pounds, shipping in the u.s., canada and mexico. u.p.s. says contract customers won't be affected. the rate hike goes into effect october 18.
>> tom: the stock market is ignoring the possibility of a slow and grinding economy. at least so says tonight's market monitor, gerald buy buy, and he joins you from charlottetownville. >> thanks very much for having me, tom. i appreciate it. >> tom: we've seen manufacturing data continuing to perk up, consumer spending up, and auto sales in the last
month up, so what does the market have wrong? >> in our view, i think the mag tie magnitude of the issues amazing the economy and in europe -- i believe the magnitude of the problems are something that is hard for the market to get their head around. i think that the magnitude of the employment issues and the real estate issues are going to take many, many years to actually repair the damage that has been done, and from the highs that we've come down from. so i think that the equity markets in particular might be underestimating the issues we're going to have to deal with from a macro economic perspective. >> tom: you know the arguments for owning stocks, and we find ourselves ahead of another earning week, and some of that is going to merger in acquisition. so why not play a part in that equity environment? >> two comments: one, i
think the earnings estimates that are being used to justify the current valuations are a little bit of a head-scratcher for us here at innealta. if someone is trying to convince me earnings in the aggregate -- we're talking more in generalizations, are going to be higher than what they were a few years ago, when we had 15 million more people working at higher wages than they're working now, and we have somewhere in the order of $10 trillion worth in paper wealth that people thought they owned. i find that difficult to swallow, truthfully. i also don't see anything in the monetary or fiscal pipeline that is going to fix this. i want to believe that the economy is going to grow at a healthy pace, but it empirical evidence just shows otherwise. at innealta, we would rather expose our clients and portfolios where we think there is a better
risk return tradeoff. >> tom: and you brought along some of those ideas. you do like bonds, specifically high yield, a.k.a., junk corporate bonds. each are up 7% over the last 12 months. h.y.g. and j.n.k.what are your expectations for these? >> we do like it. innealta is purely an in shop. we like j.n.k. and h.y.g.. j.n.k. is up over 10%. on an historical basis, we like what the spreads are. we think that the corporate balance sheets are very, very strong, relative to where they have been historically. >> tom: this is way to play that corporate cash on the sidelines. as opposed to having the
equity, you want to own the bonds. >> yes, i believe so. and back to your excellent point on mergers and acquisitions. c.f. 0s are responsible for the values. the fact they have nowhere to go but to acquire an existing entity, i think there is information that most folks are ignoring. >> tom: lots of people are acquiring gold. for the second week we've had someone in your chair recommending i.a.u.. >> we think that gold has a little bit of play. it is a safety vessel, and the e.t. s. are great ways for retail investors to get their direct access to boullion. and we think gold has room to move on the up side, and we remain bullish. >> tom: gerald, any discloarches for the %?
>> we are owners of i.a.u., h.n.k. christian >> susie: and finally, today could be remembered as facebook friday. it's a really big day for the giant online social network. first, the privately held company announced today a five- for-one split of the company's shares. and, sony's much-anticipated film "the social network" opened. it's the unauthorized story of facebook founder mark zuckerburg and details the history of facebook. as for the question on everyone's mind: when will facebook go public? tom, it won't happen for another two years, according to what a board member told reuters. >> tom: it could be a big opening at the box office. not nearly as big at the i.p.o., once it finally hits the street. that is "nightly business report" on this friday. thanks for joining us. it is october 1st, i'm tom hudson, have a wonderful weekend. >> susie: you, too, tom. i'm susie gharib, good